The upshot? Per Green Street, right now REITs on average trade at a 4% discount from the value of the underlying assets--which is interesting because in recent history they've traded at a 2% premium.

I think that there are some downsides with REITs compared to privately owned.

You need to be careful with how leveraged the REIT is.

Most dividend payouts from REITs are taxed as ordinary income (not capital gains like stocks!) and you do not get the tax deductions you would get with privately own property.

REITs typically have much larger overhead and management fees than a property that you own yourself.

I believe that REITs are positively correlated with the stock market, not negative like bonds. This would be fairly different from property that you own yourself. Your rental income won't fall when stocks do, people still need places to live whereas an REIT need to keep buying new properties.

What happens to the REIT if property prices decrease and the REIT is underwater? If you own a personal property you can wait out this period. With an REIT you don't have that control.

There are lots of different properties that REITs focus on. Make sure you understand if they are investing in single family homes, multi-family, commercial, etc.

Oh, and one I forgot: As an individual you have access to 30 year fixed mortgages. Commercial mortgages that REITs have to take do not work that way! So the return on existing properties can be affected by changing interest rates while a property that you own would not.

I'm not going to post here link to blog article that steps through process, but you can do an interesting calculation to show how MPT works using REITs and US stocks... using longest available calculation period through 2017 at portfolio visualizer, both asset classes generated about 9.5% return annually... but if you combine these two asset classes 50-50 and rebalance you experience the same risk but earn 10%.

At least for an ETF, you can't have a -4% discount against assets under normal market conditions. Institutional arbitragers would buy creation units of the ETF on the market, dissolve the ETF shares, and sell the underlying assets to profit off the difference. For REITs in particular, right now Vanguard REIT ETF ("VNQ") shows as $82.27/share market price for NAV worth $82.28/share, or about 0.012% (1/80th of 1%).

Interesting discussion. Seems like a lot of the "tax advantages" like depreciation and the attendant sheltered returns of capital would be a wash, despite form. Guess you're not doing any 1031s with REITs though.

REIT real estate is generally WAAAAAAAY better/more exclusive than stuff you can get via other channels (at least to my understanding...like no one is getting invited into a syndicated SL Green/Vornado Manhattan trophy office tower deal).

Regarding the disconnect between private markets and REITs (in the ballpark of 20-30% according to Sam Zell and a bunch of other RE gurus on a relatively recent Milliken Institute panel...its on youtube. I might post about it later this week), if you put a gun to my head and said explain, I would argue that the more liquid public markets are just adjusting pricing faster in a changing environment. I think I saw an institutional study maybe a month ago that showed historically private RE (maybe using cap rates) followed REITs, with a consistent time lag. Probably available via some google fu.

i wish there was more discussion and analysis around how to select proper REITs around the FIRE community. Maybe this will start that b/c i'm in the dark- can i not just by a REIT index at vangurad that all the US REITs compiled?

You have to be real careful because a private REIT can be virtually anything. You buy in thinking you're buying shopping malls that might be doing well only to find that it's only 1/2 percent invested in that and 99.5% invested in credit default swaps.

I'm not going to post here link to blog article that steps through process, but you can do an interesting calculation to show how MPT works using REITs and US stocks... using longest available calculation period through 2017 at portfolio visualizer, both asset classes generated about 9.5% return annually... but if you combine these two asset classes 50-50 and rebalance you experience the same risk but earn 10%.

Ah, stocks vs REIT is a slightly different question. I think the main concern that I would have is the short history and therefore the lack of data for back testing when compared to stocks. One 20 year period doesn't seem terribly trustworthy.

VNQ is interesting as it doesn't seem to buy any leveraged REITs. VGSIX is the fund that Portfolio Visualizer uses to back test to 1997. Both funds are currently undergoing a change in the benchmark they are following. I'm not sure what the future implications of this change are but the new benchmark has only been around since August 2017. (MSCI US Investable Market Real Estate 25/50 Index)

It seems like some REITs are structured like an REIT but not necessarily invested in real estate? The biggest company in the new benchmark is American Towers. (~5.9%) They own communication infrastructure but not real estate! I'm not sure what the impact of these companies that operate as REITs but don't actually own real estate will be and how that would be different from owning companies through stocks instead of REITs.

My other thought would be how much real estate exposure do we already get through either an S&P 500 fund or a Total Stock market fund? As an example McDonald's is one of the largest real estate companies out there! And the Vanguard S&P 500 has 2.7% REITs already in it.

I'm not going to post here link to blog article that steps through process, but you can do an interesting calculation to show how MPT works using REITs and US stocks... using longest available calculation period through 2017 at portfolio visualizer, both asset classes generated about 9.5% return annually... but if you combine these two asset classes 50-50 and rebalance you experience the same risk but earn 10%.

Ah, stocks vs REIT is a slightly different question. I think the main concern that I would have is the short history and therefore the lack of data for back testing when compared to stocks. One 20 year period doesn't seem terribly trustworthy.

VNQ is interesting as it doesn't seem to buy any leveraged REITs. VGSIX is the fund that Portfolio Visualizer uses to back test to 1997. Both funds are currently undergoing a change in the benchmark they are following. I'm not sure what the future implications of this change are but the new benchmark has only been around since August 2017. (MSCI US Investable Market Real Estate 25/50 Index)

It seems like some REITs are structured like an REIT but not necessarily invested in real estate? The biggest company in the new benchmark is American Towers. (~5.9%) They own communication infrastructure but not real estate! I'm not sure what the impact of these companies that operate as REITs but don't actually own real estate will be and how that would be different from owning companies through stocks instead of REITs.

My other thought would be how much real estate exposure do we already get through either an S&P 500 fund or a Total Stock market fund? As an example McDonald's is one of the largest real estate companies out there! And the Vanguard S&P 500 has 2.7% REITs already in it.

I like REITs for a couple of reasons:

1. They represent a real asset, so an inflation hedge. (David Swensen's suggested asset allocation for individual investors puts 30% of your portfolio into real assets btw... 15% into REITs and 15% into TIPs. Perhaps this represents his attempt to partially immunize a portfolio against the 1966 scenario.)

2. They lack correlation with US stocks so when you throw them into the mix you either get a higher return or a lower risk or maybe a little of both.

BTW, Bill Bernstein doesn't like REITs because the expected returns are so low, a point he explores in his rather useful book, Rational Expectations.

Since this is a MMM forum, are there any REITs which only invest in Mustachian-friendly real estate? By this I mean walkable, bikeable, mixed-use cities and neighborhoods, as apposed to the cookie-cutter, McMansion, strip-mall garbage that makes up much of the real estate in the US. The former tends to be more resilient during economic downturns.

Since this is a MMM forum, are there any REITs which only invest in Mustachian-friendly real estate? By this I mean walkable, bikeable, mixed-use cities and neighborhoods, as apposed to the cookie-cutter, McMansion, strip-mall garbage that makes up much of the real estate in the US. The former tends to be more resilient during economic downturns.

They're small and working on profitability, but HASI (Hannon Armstrong Sustainable Infrastructure) is a green energy REIT. Decent dividend, and low share price, so I recently took a small flyer on them.

Personally I prefer REITs to investment properties:-Less difficult to file taxes-No active property management to do (this is very time consuming)-No nightmare tenant stories, no court dates, no serving paperwork from courts-No legwork to fill vacancies

Meanwhile, you get access to better markets through REITs. I invest in individual REIT securities because of the dividends. I don't worry about the value of the investment, only the free cash flow and the dividend. If the dividend is stable, the share price can be what it will be, and if the business is solid, it only makes me want to buy more.

Further, REITs get beat up every time the Fed raises rates since they rely on debt to finance portfolio acquisitions, but there's a little lag time and they always seem to recover. And they have less correlation to the market at large. With bonds and bond funds getting dinged so badly over the past many years, they are as good an alternative as any for those looking to minimize the impact of a bear market, should one be headed our way soon as many predict.

Since this is a MMM forum, are there any REITs which only invest in Mustachian-friendly real estate? By this I mean walkable, bikeable, mixed-use cities and neighborhoods, as apposed to the cookie-cutter, McMansion, strip-mall garbage that makes up much of the real estate in the US. The former tends to be more resilient during economic downturns.

Investing in individual REITs (or individual stocks) greatly increases your risks. For that reason, I personally would not ever do that. Rather, I'd go with an REIT index fund or stock index fund.

BTW, you can find socially responsible mutual funds and invest through those rather than index funds. That might be a way to allow you to let your investing partly reflect your ethics. (I think if you do this, you'd probably need to save more and accept lower withdrawal rates to reflect the inefficiencies of such an approach.)

Since this is a MMM forum, are there any REITs which only invest in Mustachian-friendly real estate? By this I mean walkable, bikeable, mixed-use cities and neighborhoods, as apposed to the cookie-cutter, McMansion, strip-mall garbage that makes up much of the real estate in the US. The former tends to be more resilient during economic downturns.

Investing in individual REITs (or individual stocks) greatly increases your risks. For that reason, I personally would not ever do that. Rather, I'd go with an REIT index fund or stock index fund.

BTW, you can find socially responsible mutual funds and invest through those rather than index funds. That might be a way to allow you to let your investing partly reflect your ethics. (I think if you do this, you'd probably need to save more and accept lower withdrawal rates to reflect the inefficiencies of such an approach.)

Has there been any guidance from the IRS on whether the 20% QBI deduction applies to REIT funds? The Bogleheads seem to think it only applies to individual REITs.

Since this is a MMM forum, are there any REITs which only invest in Mustachian-friendly real estate? By this I mean walkable, bikeable, mixed-use cities and neighborhoods, as apposed to the cookie-cutter, McMansion, strip-mall garbage that makes up much of the real estate in the US. The former tends to be more resilient during economic downturns.

Investing in individual REITs (or individual stocks) greatly increases your risks. For that reason, I personally would not ever do that. Rather, I'd go with an REIT index fund or stock index fund.

BTW, you can find socially responsible mutual funds and invest through those rather than index funds. That might be a way to allow you to let your investing partly reflect your ethics. (I think if you do this, you'd probably need to save more and accept lower withdrawal rates to reflect the inefficiencies of such an approach.)

Has there been any guidance from the IRS on whether the 20% QBI deduction applies to REIT funds? The Bogleheads seem to think it only applies to individual REITs.

The Tax Act Reduces the Tax on Ordinary REIT Dividends by Providing a 20 Percent Deduction for Non-Corporate Taxpayers

U.S. taxpayers (other than corporations) may now deduct 20 percent of the amount of ordinary REIT dividends (generally speaking, dividends that are not capital gain dividends) they receive, subject to the limitation that the combined deduction for QBI and ordinary REIT dividends cannot exceed 20 percent of the taxpayer’s income and gain for the year that is taxable at ordinary income rates. Thus, the top marginal tax rate on ordinary REIT dividends that qualify for the 20 percent deduction under the Tax Act is 29.6 percent (or 33.4 percent including the 3.8 percent Medicare tax on net investment income).

As noted earlier, the 20 percent deduction for ordinary REIT dividends is not subject to the wage/capital limitation described above, while the deduction for QBI derived through a partnership, limited liability company taxed as a partnership or S corporation is subject to this limitation. Consequently, an investor that would otherwise be subject to the wage/capital limitation might be better off making the same investment through a REIT. In the case of an investment in real estate mortgage debt, if the investment is held through a partnership, and the partnership is an investor rather than being in the business of lending, the interest income will not be QBI, and no deduction will be available; in contrast, if the investment is held through a REIT, ordinary dividends from the REIT will be eligible for the 20 percent deduction. Thus, the use of a REIT structure may significantly reduce the federal income tax on certain investments in real estate mortgage debt. We note, however, that the 20 percent deduction for ordinary REIT dividends currently does not apply if the interest in a REIT is held through a regulated investment company (i.e., a mutual fund).

These provisions will also expire on December 31, 2025.

One of several reasons I personally favor individual REITs over REIT funds, plus the yields tend to be better. While index investing is generally better, I'd make the case that REIT ownership takes many of the positives of direct rental property investment (without the hassle), but with added diversification beyond that. If the REIT starts moving in a direction you don't agree with, you can always sell and buy a different REIT. IMO it doesn't require the same scrutiny that, say, a publicly traded company that deals in other products or services might, because there will always be a need for housing, and REITs have enough market capital that there really isn't a huge "innovation" threat.

I get why the tax attorneys who wrote that think the way they do. The chunks of tax law (Sections 851-855) that describe how regulated investment companies work specifically say that qualified dividends, tax-exempt income, and foreign taxes essentially "pass through" the mutual fund with their character intact and get treated as qualified dividends, tax-exempt income and foreign taxes on the shareholder's return.

But I would be surprised if the Sec. 199A regs that come out later this month don't let REIT mutual fund shareholders use Sec. 199A.

Note: This Sec. 199A stuff would only matter to people investing in REITs in taxable accounts.